Analysts Fret Over Infosys Family Values

A Central Industrial Security Force officer stands guard at the Infosys building in Electronic City in Bangalore on July 31, 2009.

Analysts are watching Infosys Ltd. amid reports that the main founder’s son will be promoted to a senior position, a move that some of them say could hurt the company’s reputation for high standards of corporate governance.

At the time, Mr. Murthy said his son wouldn’t be given a leadership role.

“His designation in the company will be confirmed once the process of his appointment has been completed,” the company, which is listed in New York and Mumbai, said in a statement.

HDFC Securities said investors wouldn’t take kindly to the promotion of Mr. Murty if it meant he bypassed time in middle management, adding that it would cut the company’s rating in such an eventuality. The brokerage, however, said it doesn't have a rating on the stock.

"Now, we don't have any opinion on junior Murthy's ability, but making him a vice president surely diminishes the halo around Infosys's corporate governance standards," HDFC Securities said in a report Monday.

Peter Schumacher, president and chief executive of Germany-based management consulting firm Value Leadership, added that the promotion shows the future of Infosys will increasingly depend on the decisions of the Murthy family.

“The underlying risk is that a power struggle, blame and loyalty game will develop between the family and professional management," he said. "How this drama unfolds may well determine the fate of the company."

Mr. Murthy returned as executive chairman on June 1. During his previous tenure in that position, from 2002 to 2006, Infosys’s revenue quadrupled to $2.15 billion.

“Mr. Murthy’s focus on extremely high corporate governance standards, while at the helm of Infosys, was one of the key factors that made him an industry figure,” Ray Wang, chief executive of U.S.-based Constellation Research, said on news of Mr. Murthy’s return in June.

"Is bringing in Narayana Murthy’s son as his own executive assistant appropriate for a company that upholds corporate governance and whose founders have publicly decried bringing their progeny into the company?" brokerage JP Morgan added in a report at the time.

Mr. Murthy came back to a company facing challenges, including declining sales and an ongoing investigation by the U.S. Justice Department for alleged violation of a temporary work visa rule. For this fiscal year through March, Infosys expects sales in dollar terms to grow just 6%-10%, below the 12%-14% forecast for
India’s outsourcing industry as a whole.

The rise of founding family scions isn’t a new phenomenon in India’s technology industry. Wipro, India's third largest software exporter, appointed Rishad Premji, the eldest son of billionaire founder and chairman Azim Premji, as manager in its technology division in 2007. He rose up the ranks to become chief strategy officer in 2011.

In 2009, HCL Corp., the parent of India’s fourth largest outsourcing company HCL Technologies Ltd., appointed Roshni Nadar Malhotra, the daughter of the company's billionaire founder Shiv Nadar, as executive director and chief executive.

Infosys shares touched a 52-week high of 3,126.95 rupees ($46.42) Wednesday. Thursday morning, the shares were off 0.8% at 3,095 rupees while the Sensex was up 0.8%.